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# GAAP

Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.
Depreciation is a process of allocation.
Cost to be allocated = acquisition cot - salvage value
Allocated over the estimated useful life of assets.
Allocation method should be systematic and rational.

Depreciation Methods

## Depreciation methods based on time

Straight line method
Declining balance method
Sum-of-the-years'-digits method

## [Example, Straight line depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of \$140,000. This equipment is estimated to have 5 year useful life. At the
end of the 5th year, the salvage value (residual value) will be \$20,000. Company A recognizes depreciation to the nearest whole month. Calculate
the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method.

## Depreciation for 2011

= (\$140,000 - \$20,000) x 1/5 x 9/12 = \$18,000

## Depreciation for 2012

= (\$140,000 - \$20,000) x 1/5 x 12/12 = \$24,000

## Depreciation for 2013

= (\$140,000 - \$20,000) x 1/5 x 12/12 = \$24,000

## Depreciation = Book value x Depreciation rate

Book value = Cost - Accumulated depreciation

## Depreciation rate for double declining balance method

= Straight line depreciation rate x 200%

## Depreciation rate for 150% declining balance method

= Straight line depreciation rate x 150%

## [Example, Double declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of \$140,000. This equipment is estimated to have 5 year useful life. At the
end of the 5th year, the salvage value (residual value) will be \$20,000. Company A recognizes depreciation to the nearest whole month. Calculate
the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method.

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

## Depreciation rate for double declining balance method

= 20% x 200% = 20% x 2 = 40% per year

## Depreciation for 2011

= \$140,000 x 40% x 9/12 = \$42,000

## Depreciation for 2012

= (\$140,000 - \$42,000) x 40% x 12/12 = \$39,200

## Depreciation for 2013

= (\$140,000 - \$42,000 - \$39,200) x 40% x 12/12 = \$23,520

## Double Declining Balance Depreciation Method

Book Value
Year Depreciation Rate Depreciation Expense Book Value at the year-end
at the beginning
2011 \$140,000 40% \$42,000 (*1) \$98,000
2012 \$98,000 40% \$39,200 (*2) \$58,800
2013 \$58,800 40% \$23,520 (*3) \$35,280
2014 \$35,280 40% \$14,112 (*4) \$21,168
2015 \$21,168 40% \$1,168 (*5) \$20,000

## (*1) \$140,000 x 40% x 9/12 = \$42,000

(*2) \$98,000 x 40% x 12/12 = \$39,200
(*3) \$58,800 x 40% x 12/12 = \$23,520
(*4) \$35,280 x 40% x 12/12 = \$14,112
(*5) \$21,168 x 40% x 12/12 = \$8,467

--> Depreciation for 2015 is \$1,168 to keep book value same as salvage value.
--> \$21,168 - \$20,000 = \$1,168 (At this point, depreciation stops.)

## [Example, 150% declining balance depreciation]

On April 1, 2011, Company A purchased an equipment at the cost of \$140,000. This equipment is estimated to have 5 year useful life. At the
end of the 5th year, the salvage value (residual value) will be \$20,000. Company A recognizes depreciation to the nearest whole month. Calculate
the depreciation expenses for 2011, 2012 and 2013 using double declining balance depreciation method.

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

## Depreciation rate for double declining balance method

= 20% x 150% = 20% x 1.5 = 30% per year

## Depreciation for 2011

= \$140,000 x 30% x 9/12 = \$31,500

## Depreciation for 2012

= (\$140,000 - \$31,500) x 30% x 12/12 = \$32,550

## Depreciation for 2013

= (\$140,000 - \$31,500 - \$32,550) x 30% x 12/12 = \$22,785

## 150% Declining Balance Depreciation Method

Book Value
Year Depreciation Rate Depreciation Expense Book Value at the year-end
at the beginning
2011 \$140,000 30% \$31,500 (*1) \$108,500
2012 \$108,500 30% \$32,550 (*2) \$75,950
2013 \$75.950 30% \$22,785 (*3) \$53,165
2014 \$53,165 30% \$15,950 (*4) \$37,216
2015 \$37,216 30% \$11,165 (*5) \$26,051
2016 \$26,051 30% \$6,051 (*6) \$20,000

## (*1) \$140,000 x 30% x 9/12 = \$31,500

(*2) \$108,500 x 30% x 12/12 = \$32,550
(*3) \$75,950 x 30% x 12/12 = \$22,785
(*4) \$53,165 x 30% x 12/12 = \$15,950
(*5) \$37,216 x 30% x 12/12 = \$11,165
(*6) \$26,051 x 30% x 12/12 = \$7,815

--> Depreciation for 2016 is \$6,051 to keep book value same as salvage value.
--> \$26,051 - \$20,000 = \$6,051 (At this point, depreciation stops.)

Sum-of-the-years'-digits method

## Depreciation expense = (Cost - Salvage value) x Fraction

Fraction for the first year = n / (1+2+3+...+ n)
Fraction for the second year = (n-1) / (1+2+3+...+ n)
Fraction for the third year = (n-2) / (1+2+3+...+ n)
...
Fraction for the last year = 1 / (1+2+3+...+ n)

## Company A purchased the following asset on January 1, 2011.

What is the amount of depreciation expense for the year ended December 31, 2011?
Acquisition cost of the asset --> \$100,000
Useful life of the asset --> 5 years
Residual value (or salvage value) at the end of useful life --> \$10,000
Depreciation method --> sum-of-the-years'-digits method

## Calculation of depreciation expense

Sum of the years' digits = 1+2+3+4+5 = 15
Depreciation for 2011 = (\$100,000 - \$10,000) x 5/15 = \$30,000
Depreciation for 2012 = (\$100,000 - \$10,000) x 4/15 = \$24,000
Depreciation for 2013 = (\$100,000 - \$10,000) x 3/15 = \$18,000
Depreciation for 2014 = (\$100,000 - \$10,000) x 2/15 = \$12,000
Depreciation for 2015 = (\$100,000 - \$10,000) x 1/15 = \$6,000

## Sum of the years' digits for n years

= 1 + 2 + 3 + ...... + (n-1) + n = (n+1) x (n / 2)

## Sum of the years' digits for 500 years

= 1 + 2 + 3 + ...... + 499 + 500
= (500 + 1) x (500 / 2) = (501 x 500) / 2 = 125,250